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Solomon

House Flipping in Australia

10 posts in this topic

Greetings to all.

I have several questions after watching the new "flipping" show on Channel Seven (7) last night - Aussie Property Flippers. As the name suggests it is based in Australia.

Without wanting to give "it" too much publicity let me outline the gist of the show.

One couple purchased a home in Baulkham Hills in NSW -- $850,000. The other couple bought an apartment in Coolangatta, Qld - I think it was for $300,000.  The house sold for $1.3 million after they had spend $140,000 on reno. The couple decided to keep the apartment as a rental after spending $40,000, but it was then independently valued at $440,000. Obviously these windfalls were presented to the viewing public as complete profit after a period of 12 - 20 weeks renovating.

My questions are these.

Aren't these properties (and all flipping in Australia) subject to Capital Gains Tax? When is this required to be paid?

Was the Stamp Duty factored into the purchase price, or is that additional to the price? (This wasn't clearly spelt out in the programme)

Are there other fees and charges incurred in renovations by Local Council's, State bodies, etc, in undertaking renovations? (Whilst these weren't mentioned in the programme, they could have been included in the overall renovation costs.)

The "profit" the couples achieved, would now, I assume, be subject to Income Tax?

Do they have to be registered with some Building Authority in order to carry out these renovations?

Are the renovations required to be inspected to ensure they comply with building codes in the various places?

I would be interested to hear the answers to a few of these. There may be others as well, which, of course, get conveniently overlooked during the show.

 

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On 27/04/2017 at 11:55 AM, Solomon said:

Aren't these properties (and all flipping in Australia) subject to Capital Gains Tax? When is this required to be paid?

The "profit" the couples achieved, would now, I assume, be subject to Income Tax?

 

CGT on the retained unit is only payable after sale. No income tax on the increase in value.

CGT on the house would be payable after sale too. However, it may be deemed that this couple are in the business of flipping and the profit would be treated as ordinary income. If they owned the house for less than a year it wouldn't make a difference to the tax. If owned for more than a year and they can claim it was a CGT event and not ordinary income they would get the 50% discount. 

CGT is included in an individual's tax return due end of October if doing yourself or around May if using a tax agent. Tax payable will be due a month or two after lodging. So if selling on July second and using an accountant CGT would not be payable for almost two years.

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Thanks Zaph.

You're obviously very knowledgeable on these matters. I appreciate you taking the time to answer my questions.

I guess I was trying to make the point that anyone watching the show needs to factor in some additional outlays, rather than literally treat the difference between purchase/renovation and sale as pure profit.

Your comments are very helpful. I still can't believe the CGT would possibly not be payable for 2 years after the event. So if they flipped 4 - 5 houses per year that would require good accounting to keep track of their outlays. Interesting.

Edited by Solomon
Grammar mistake.

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41 minutes ago, Solomon said:

Thanks Zaph.

You're obviously very knowledgeable on these matters. I appreciate you taking the time to answer my questions.

2

You're welcome. I did a B. Commerce majoring in accounting in another life, but never really pursued it. That training allows me to know the questions to ask google and translate it to simple language when I don;t know the answers off the top of my head. I quite enjoy answering your kind of posts - makes me keep at least a bit up to date. I'm far far from an expert.

Quote

I guess I was trying to make the point that anyone watching the show needs to factor in some additional outlays, rather than literally treat the difference between purchase/renovation and sale as pure profit.

 

Those sort of shows always exaggerate profit. 

Quote

 

Your comments are very helpful. I still can't believe the CGT would possibly not be payable for 2 years after the event. So if they flipped 4 - 5 houses per year that would require good accounting to keep track of their outlays. Interesting.

 

 

It's up to almost 2 years and up to almost one year depending if you sell on the 29th June or the 2nd July. 

If they were flipping 4 houses a year that would be business/ordinary income (the houses would be considered trading stock rather than investments) and they would definitely be paying income tax rather than CGT1. If they were doing it that regularly they would be paying instalment tax - monthly or quarterly. Instalment tax is like the tax your employer pays to the ATO as an estimate of what your final yearly tax due would be. 

1 - They would be trying hard to classify it as CGT. But at even one a year regularly it would be ordinary income. 

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Income tax at top marginal rate compared to 25% cgt. Reward for hard work is a myth.

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2 hours ago, staringclown said:

Income tax at top marginal rate compared to 25% cgt. Reward for hard work is a myth.

wrong

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13 hours ago, staringclown said:

Income tax at top marginal rate compared to 25% cgt. Reward for hard work is a myth.

CGT is not a fixed %. It may be nothing or roughly 25% for someone earning in the highest tax bracket. 

The gain is calculated and discounted by 50% if the asset is owned for more than 12months. This amount is added to taxable income and tax calculated on that.

eg:

Couple sell a house and make a $400k gain. They've owned it for over 12months so the gain is halved. $100k is added to each of the couples other income. If they have no other income then tax is around 14k each or an effective CGT rate of 7%. Say they both earn $87k then the effective CGT rate is 20%. There is a strong motivation to bring down income. eg - sell the house in a year they have less other income (maternity leave, take a year off work), prepay interest on other investments, salary sacrifice to super etc.

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1 hour ago, zaph said:

Say they both earn $87k then the effective CGT rate is 20%. There is a strong motivation to bring down income. eg - sell the house in a year they have less other income (maternity leave, take a year off work), prepay interest on other investments, salary sacrifice to super etc.

1

I thought I would work through the above idea to reduce tax. In the above example, the CGT is $39k each. Let's assume they both own another IP each which is neutrally geared and owe $500k at 5% interest.

Each person could salary sacrifice $17k to super and prepay a year's interest on their other IP (now making it negatively geared by 25k). This would reduce their income by 42k each. CGT would now be 23k, but they (or more correctly their super fund) have to pay 15% on the 17k = 2.5k. So they are both 13.5k better off, bringing the effective CGT to 13%.

Prepaying interest creates an issue - next year they will have no deduction for interest on their other IPs. If they pay no interest next year then they will have another 25k of income to pay tax on. They could just prepay interest next year as well, and the year after, and the year after. This strategy allows flexibility to not pay the interest in a low-income year. 

A very simple example with simple assumptions. But there you have it Clown, an easy way for the couple to avoid 27k in tax! If they had adult children with no income it would be easy to get that effective CGT down to 7% using trusts. It might not be wise to chuck money into super if you're 30 but if you're 63 it's a no-brainer. 

 

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Thanks zaph.

So more correctly I should have said Income tax at top marginal rate compared to 0-25% cgt. Reward for hard work is a myth.:)

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